Duncan: Credit Card Market Is Unfair, Noncompetitive

Few industries have faced more huge antitrust lawsuits and federal investigations in the past decade than the credit card industry.

MasterCard and the bigger Visa have settled lawsuits out of court for billions of dollars, settled with the Justice Department over their mistreatment of merchants and have even been sued by American Express and Discover over antitrust violations.

Just a few weeks ago, Visa announced that the DOJ was investigating the company again, this time for trying to tie its credit and debit products — potentially undoing the changes it had to make after an earlier antitrust case.

And within the past few days, Europe’s second-highest court ruled that MasterCard was gouging European merchants in violation of antitrust laws.

There’s a reason for this litany and, behind all these complex lawsuits and investigations, it’s really quite a simple one: The business is basically two companies, each separately using the collective market power of all their banks to fix fees the banks charge and the rules for credit and debit card transactions. That has been a formula for mischief across the globe.

Visa and MasterCard still behave like the collectives owned by banks that they were until selling stock to the public a few years ago. The banks still get their high fees. The merchants who accept the cards and their customers always come out the losers.

It’s a broken, dysfunctional market, tilted in such a way that — without competition — fees continually rise, despite advances in technology and increasing economies of scale.

American merchants pay the highest swipe fees in the industrialized world and have done so for years. In the United States, card fees are merchants’ second-largest operating cost after labor.

That, of course, means higher prices for their customers in a hyper-competitive market where margins are often only a few pennies on a dollar. Through these fees, banks make more on selling gas, for instance, than most gas stations.

Even just a quick look at the past decade shows a pattern of the card companies running afoul of the antitrust laws time and again.

Retailers and government regulators have been battling the credit card companies and the banks over this since well before 1996, when 4 million merchants sued Visa and MasterCard in federal court for making them accept debit cards if they wanted to accept credit cards — and then dramatically increasing the debit card swipe fees.

Then, in 1998, the DOJ sued Visa and MasterCard over their rules prohibiting their banks from doing business with American Express or Discover. The DOJ won that case in 2001, and it held up on appeal.

In 2003, the credit card companies agreed to settle the merchants’ case for $3 billion, still a record in an antitrust case.

American Express and Discover sued Visa and MasterCard, too, based on the case brought by the DOJ and the business lost as a result of Visa and MasterCard blocking the banks from working with American Express and Discover.

In 2005, retailers sued the card companies again for fixing fees and rules for the banks in violation of the antitrust laws. That suit has yet to be heard.

In 2010, the DOJ sued Visa, MasterCard and American Express for prohibiting merchants from giving customers discounts for using cheaper cards. Visa and MasterCard settled that case the day it was filed.

“We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anti-competitive rules, we will accomplish exactly that,” Attorney General Eric Holder said at the time. “The companies put merchants and their customers in a no-win situation.”

And it’s not just the United States’ antitrust laws that Visa and MasterCard break. The European Union’s competition commissioner just won a court case in which MasterCard tried to show its fees didn’t violate the law. The court ruled against MasterCard.

And the credit card fees the EU was concerned about are about eight times lower than fees in the United States. In fact, the court found that consumers get absolutely no benefit from these fees and there don’t need to be any fees at all. That is just the latest in a series of European antitrust probes. Canada’s government just held hearings on the fees, too.

Remarkably, every country that has examined the credit card industry’s practices has found serious problems with it — or hasn’t yet completed its probe. That is a remarkably bad record and shows what is plain to see: The way the industry is structured is fundamentally flawed. It inhibits competition and hurts businesses, consumers and economies.

In the United States, more than a decade of lawsuits, investigations and federal legislation has not created a card market that is free and fair. The U.S. has moved slowly compared with other industrialized countries in trying to make this a competitive market, but at least there has been some movement. Now, it’s time for more reform so we get out of the no-win situation the credit card industry has put us in.

Mallory Duncan is chairman of the Merchants Payments Coalition and general counsel of the National Retail Federation.